Self-Employment Tax, Explained With One Example

Short Answer: Self-employment tax is 15.3% of 92.35% of your net business profit: 12.4% for Social Security and 2.9% for Medicare. It's owed on top of income tax, on any profit of $400 or more. In 2026 the Social Security part stops at $184,500 of earnings; the Medicare part doesn't stop. On $114,000 of profit it comes to about $16,100, roughly 14% of profit.

The first year as an owner, the tax bill is usually bigger than expected, and self-employment tax is most of the reason. Employees never see half of it, because their employer pays that half quietly. When you work for yourself, you pay both halves.

What Is Self-Employment Tax?

Self-employment tax is Social Security and Medicare tax for people who work for themselves. An employee pays 7.65% of their wages and the employer pays a matching 7.65%. A sole proprietor, a single-member LLC owner or a partner is both sides at once, so the rate is the two halves added together: 15.3%.

It funds the same benefits as the payroll tax on a paycheck. Your self-employment earnings go on your Social Security record and count toward your future benefits.

How Is It Calculated?

Three steps, all on Schedule SE of your personal return:

1. Start from net profit. That's revenue minus business expenses, the bottom line of your Schedule C. Owner's draws don't matter here; you're taxed on profit, whether you took it out or not.
2. Multiply by 92.35%. This trims the base by 7.65%, the employer's half, so you're treated like an employee whose employer's share isn't counted as wages.
3. Apply 15.3% to that base: 12.4% Social Security, up to the year's wage base, plus 2.9% Medicare on all of it.

If net profit is under $400, there's no self-employment tax.

A Worked Example: $114,000 of Profit

Take a hypothetical landscaping company, Greenline Landscaping: one owner, a crew of four, about $520,000 a year in revenue, run as a single-member LLC taxed the default way. It makes $114,000 of profit before paying the owner. The owner files single and lives in a state with no income tax.

That's 14.1% of profit, owed before any income tax. The base is well under the 2026 Social Security cap of $184,500, so the full 12.4% applies.

Is It on Top of Income Tax?

Yes. Income tax is figured separately on the same profit, after deductions. Two deductions link the two taxes:

• Half of your self-employment tax is deductible from income. At Greenline that's $8,054, and it lowers the owner's federal income tax by about $1,400.
• The qualified business income deduction lets most owners deduct up to 20% of business profit from income tax. It reduces income tax only. Self-employment tax is untouched.

Here is Greenline's full federal picture for 2026:

About 23% of profit goes to federal tax, and self-employment tax is 60% of the bill. For a business owner at this income, the tax that feels like "payroll" is bigger than the income tax.

Where Does the Cap Come In?

Social Security tax stops once your combined wages and self-employment earnings reach the year's wage base, $184,500 in 2026. Above it, only the 2.9% Medicare part continues. A separate 0.9% Additional Medicare Tax starts at $200,000 of earnings for a single filer.

For most owner-operated businesses the cap doesn't matter. Greenline's owner would need about $200,000 of profit before the 12.4% part stopped. If you also hold a W-2 job, though, those wages count toward the cap first, and less of your business profit carries the Social Security share.

Can I Lower It?

Two things legitimately lower it, and several common moves don't:

• Record every real business expense. Self-employment tax is on net profit, so a missed expense costs 14.1% plus income tax.
• Elect S-Corp taxation once profit is high enough. Payroll tax then applies only to a reasonable salary, and the rest of the profit comes out as distributions without it. The election has its own costs, and the savings depend on the salary.
• Know what doesn't help. Retirement contributions, health insurance premiums and the business income deduction all lower income tax, but none of them lowers self-employment tax.

Lowering it has a cost too. Less self-employment income means smaller Social Security earnings on your record.

What to Look For

• Your total set-aside rate. If you set aside only for income tax, you're missing the larger half. At Greenline's profit, 23% covers the federal total; a state income tax adds to it.
• Profit, not draws, as the base. The tax follows the profit on your books, whatever you took out.
• Self-employment tax over about $10,000 a year. That's roughly where owners start asking whether an S-Corp election pays. It isn't a rule, but it's the point to run the numbers.

What a Finance Consultant Would Do Next

A consultant looking at Greenline would treat the $16,108 as a planning number, not a surprise: size the quarterly payments from it, check that every business cost is recorded, and test whether an S-Corp salary of about $60,000 would lower the total bill once payroll costs are counted.

That analysis is what Occam's Model runs on your own numbers. It uses your filing status and state to work out what your business has to earn for your household after tax, models the taxes under the election you choose (sole proprietorship, S-Corp or C-Corp), and lets you build two plans and compare them side by side. When you need extra help, an expert can review it with you.

Common Questions

How much is self-employment tax on $100,000 of profit?
About $14,130: $100,000 × 92.35% × 15.3%. Income tax comes on top.

Do I pay self-employment tax if I have a full-time job too?
Yes, on business profit of $400 or more. Your W-2 wages count toward the Social Security cap first, which can reduce the 12.4% part at high combined income.

Does an LLC pay self-employment tax?
A single-member LLC taxed the default way does, through its owner's return. An LLC that elects S-Corp taxation pays payroll tax on the owner's salary instead.

Is self-employment tax deductible?
Half of it is, from your income for income-tax purposes. It doesn't reduce the self-employment tax itself.